Infrastructure key to unlocking pan-Asian integration

Published on Wednesday, 27 May 2015

Published by Ganeshan Wignaraja on Wednesday, 27 May 2015

Construction workers building a bridge in Bhutan.
Construction workers building a bridge in Bhutan.

Infrastructure in Asia is the hot topic in economic development today. There is increasing debate in public policy and media circles about the performance of infrastructure in achieving inclusive growth in Asia.

The world’s most populated and dynamic region has massive unmet infrastructure needs of about $8 trillion until 2020, there is a scramble for new infrastructure finance from the private sector, and a new regional development bank – yet there is limited discussion on the role of infrastructure to link different parts of Asia. Improving infrastructure connecting South Asia and Southeast Asia is a particularly promising regional integration scheme, which can transform the lives of millions of people.

A recent ADB/ADBI study highlights the potential for investments in infrastructure and associated software to furthering economic ties between South Asia and Southeast Asia. The study mapped emerging economic ties between the two subregions, pointed out obstacles, identified critical transport and energy projects, and estimated the potential economic effects of closer infrastructure-led regional integration.  

One of the study’s most striking findings is that the welfare gains from infrastructure-led integration are potentially large, amounting to at least $568 billion for South Asia and Southeast Asia. This is a conservative estimate under the best-case deep integration policy scenario. More populous South Asia sees a somewhat larger welfare gain of $375 billion or 8.9% of GDP, while Southeast Asia also sees notable welfare gains of $193 billion or 6.4% of GDP. Most participating countries show large gains especially smaller countries in South Asia. These results were simulated using a modern computable general equilibrium model to explore alternative policy scenarios involving South Asian and Southeast Asian economies. The best-case deep integration scenario involves:

  1. Removal of all tariffs associated with South Asian and Southeast Asian trade.
  2. A 50% reduction in non-tariff barriers associated with South Asian and Southeast Asian trade.
  3. A 15% reduction in trade costs reflecting improved trade facilitation and investments in infrastructure.

Another important finding is that an affordable $73 billion is required to meet the total cost of infrastructure investment to link the two subregions. This figure includes $34 billion for railways, $18 billion for roads, $11 billion for ports, and $11 billion for energy trading. These estimates were based on a painstaking bottom-up analysis of critical infrastructure bottlenecks and the formulation of possible projects to alleviate them. These items cover projects directly related to creating new infrastructure between South Asia and Southeast, or upgrading existing cross-border infrastructure. They do not include the cost of infrastructure projects within either South Asia or Southeast Asia.

The study also suggests that financing infrastructure-led integration in the region is problematic and public-private sector partnerships (PPPs) can be an important part of the solution.

Infrastructure investments are notoriously difficult to finance from private financial markets alone. Regional projects in particular suffer from classic market imperfections arising from high-risk and long-gestation periods, public goods aspects (which encourage free riding) and information asymmetries between lenders and borrowers. Accordingly, financing infrastructure-led integration between South Asia and Southeast Asia would require a combination of deepening Asian financial markets and new instruments. Bond markets can facilitate channelling Asian savings towards regional infrastructure projects, and guarantees for infrastructure project bonds may encourage more take-up by long-term institutional investors such as pension funds. Likewise, PPPs have notable potential particularly as a vehicle for infrastructure financing in the region’s more developed economies.

The demand and supply sides of PPP financing need tackling. Creating a few demonstration test-run PPP projects backed by capacity building and advisory services can increase demand for PPPs. Improving political risk guarantees, transparency, regulatory framework, coordination support and governance of PPP projects can stimulate supply of PPP funds.

The time seems right for such a bold venture. The slowdown in growth in People’s Republic of China means that other parts of Asia like South Asia and Southeast Asia offer opportunities for notable growth. Furthermore, the opening up of Myanmar—the key land bridge between the two sub-regions—makes possible closer infrastructure-led regional integration.

South Asia-Southeast Asia integration is no longer a pipe dream, and with national and regional policy attention, it can become a reality.